Project Report on

A STUDY ON CAPITAL MARKET

AT
SHAREKHAN LTD

BY

K.ARCHANA
(HT.No: 098 060 137)

Project submitted in partial fulfillment for the award of the Degree of

MASTER OF BUSINESS ADMINISTRATION
Osmania University, Hyderabad -500007
2006-2008

ST. PAULS P.G. COLLEGE

(Affiliated to Osmania University, Approved by
AICTE)

DECLARATION

I hereby declare that this Project Report A STUDY ON CAPITAL

MARKET AT SHAREKHAN LTD Submitted by me to the Department
of Business Management, O.U., Hyderabad, is a bonafide work undertaken
by me and it is not submitted to any other University or Institution for the
award of any degree diploma/ certificate or published any time before.

Name and Address of the Student

Signature of the Student

K.ARCHANA
H.No. 3-2-307, plot no A/18
LB NAGAR
Hyderabad

ABSTRACT
This project is all about to know the following; we may put the objectives of this
study as follows.
2

Analyzing and understanding the Indian capital markets where it includes

introduction of National Stock Exchange (NSE), Bombay Stock Exchange (BSE) and
Securities and Exchange Board of India (SEBI).
It emphasizes on all the contents of capital market such as Mutual funds, Equity,
IPO, Derivatives. It gives more importance to Equity.
This project gives an idea to the investors about the investing procedures and benefits of
investing in Equity.
To achieve the objectives of study, information and data that has been collected
and carried for the study can be of two types they are primary and secondary sources.

ACKNOWLEDGEMENT

I take this opportunity to express my deep and sincere gratitude to the

management of SHAREKHAN LTD for allowing me to undertake this project and its
various employees who lent their hand towards the completion of this study.
3

The co-operation I received from the wide cross-section of employees of

SHAREKHAN LTD makes it difficult to style out individuals for acknowledgement.

How ever, I am particularly indebted to Mr. CH. SHYAM BABU (Branch

manager) for allowing me to carry out my project work in the organization for apprising
me of the situation with necessary back up.

I especially thank my external guide Mr. SUMAN SHARMA for his guidance
towards this project.

I am also thankful to my college Director Mr. RAGHAVA REDDY,

and the principal Mrs. INDRA REDDY and Head of the Department Mrs. UMA
RANI & VISHWANATH SHARMA (faculty of finance) for providing their guidance
to complete this project work.

INDEX
Table of contents

Page No.

Chapter 1 Introduction
Scope
Objectives
Research Methodology

1
2
3

Chapter 2 Review of literature

Introduction
History
Introduction to BSE
Introduction to NSE
Introduction of SEBI

5
7
11
12
14

Chapter 3 The company

Company Profile

17

Chapter 4 Data analysis and presentation

Presentation
A study based on investors
preferences

26
57

Chapter 5 Conclusion
Findings
Conclusion

73
74

Chapter 6 Bibliography
Bibliography

76

LIST OF TABLES
5

List of Tables

Page No

Table 1

59

Table 2

60

Table 3

61

Table 4

62

Table 5

63

Table 6

64

Table 7

65

Table 8

66

Table 9

67

CHAPTER 1
INTRODUCTION

SCOPE OF STUDY
Investor can assess the company financial strength and factors that effect the
company. Scope of the study is limited. We can say that 70% of the analysis is
proved good for the investor, but the 30% depends upon market sentiment.
The topic is selected to analyses the factors that effect the future EPS of a
company based on fundamentals of the company.
The market standing of the company studied in the order to give a better scope
to the Analysis is helpful to the investors, share holders, creditors for the rating
of the company.

OBJECTIVES OF THE STUDY

To study the nature and structure of capital market.
To know the functioning of SHAREKHAN securities.
To perform the equity analysis.
To provide the way of approach for the investor to invest wisely in the market.
The purpose of doing this project is mainly to the facts that effects the company
performance.
To assess the future EPS of the company.
To examine the internal and external factors affecting the future price of the
company.
The purpose includes assessing the future market strength of the company.
The purpose also serves the investors to decide whether to invest in the company
shares to gain good returns.

RESEARCH METHODOLOGY:
Research Population : People of Hyderabad and Secunderabad.
Sample Size : 200
Techniques used to select the sample : Simple Random Sampling

Questionnaire is designed in such a manner that it has minimal ambiguity, and the
respondents can easily analyse it.

MEANS OF DATA COLLECTION : Questionnaire, Telephonic Interview, Meetings

external studies such as articles, newspapers, published journals of books.

Analyzing Technique : Chi-square technique and simple percentages.

Assumptions:
The assumptions that will be taken into consideration during this study are
The sample of 200 being chosen is a reflection of all the people in Hyderabad
and Secunderabad.
The factors effecting the decision of the population are limited to those
mentioned in the Questionnaire.

SAMPLING TECHNIQUE:
As already mentioned above, we have chosen people based on the random
sampling technique. Hence, the sampling from associated here was the population of
Hyderabad and secunderabad. And over her, the sampling technique used, will enable us

10

to use Chi-square technique, which helps us in obtaining valuable information from the
data acquired through the research.

CHAPTER 2
Review of Literature

11

INTRODUCTION
The analysis of the movement of share prices is known as the equity analysis. Equity
analysis has two main approaches, which are used in analysis of movement of share
prices. FUNDAMENTAL APPROACH and TECHNICAL APPROCH. The objective of
both the approaches is to buy at a lower price and sell at a higher price, and obtain good
return for the investment, but there is a difference between a material studies and the
basis of analysis among these two approaches.

FUNDAMENTAL ANALYST is a person who follows the fundamental approach and

could be concerned with the fundamental factors. He aims at arriving at the true worth
of the share based on current and future earnings capacity of the company. If the share
is quoted below its true worth, he would be it and if, he finds the share price is higher
than its true worth, he would be booking profits or will try to move out of the scrip.

TECHNICAL ANALYST is person who follows the technical approach and is

concerned with the direction of movement of shares. He would be buying, if he sees
that the main trend is raising and would be moving out of the scrip as and when he finds
the scrip is reversing direction. His approach is based mainly on analysis of DEMAND
SUPPY equation. If the demand for the scrip is greater than its supplies the prices
would be expected to raise, prompt in the analyst to buy. On the same count, if the
supply of a scrip exceeds its supplies the prices would be expected to raise, prompt In
the analyst to buy. On the same count, if the supply of a scrip exceeds its demand, the
prices are expected to move downwards or drop and he would exit from the scrip of
book profits. Though there are two approaches to investing in the scrips more often the
analyst is Familiar with both approaches. A technical analyst would look at the basic

12

fundamentals before investing and the fundamentals before investing and the
fundamental analyst would bear in mind the technical position if the market.

FUNDAMENTAL FACTORS
According to the classical investment theory, fundamental analysis is based on
the theory that the price of a share is affected by the dividends that the shareholders
expect to receive from the company in future. Fundamental analysis aimed at estimation
the future price of a share. This future price is dependant on a the future EPS of the
company, as well as on how the market perceives the risk of share, I.e., the future P/E in
future.

Future price = Future EPS * Future P/E

13

BRIEF HISTORY OF INDIAN CAPITAL MARKET

The origination of the Indian securities market may be traced back to 1875, when 22
enterprising brokers under a Banyan tree established the Bombay Stock Exchange (BSE).
Over the last 125 years, the Indian securities market has evolved Continuously to become one
of the most dynamic, modern and efficient securities Markets in Asia. Today, Indian markets
conform to international standards both in Terms of structure and in terms of operating
efficiency.

There are 22 stock exchanges in India, the first being the Bombay Stock Exchange (BSE),
which began formal trading in 1875, making it one of the oldest in Asia. Over the last few
years, there has been a rapid change in the Indian securities market, especially in the
secondary market. Advanced technology and online-based transactions have modernized
the stock exchanges. In terms of the number of companies listed and total market
capitalization, the Indian equity market is considered large relative to the country's stage of
economic development. The number of listed companies increased from 5,968 in March
1990 to about 10,000 by May 1998 and market capitalization has grown almost 11 times
during the same Period.

The capital market consists of primary and secondary markets. The primary market in
which public issue of securities is made through a prospectus is a retail market and there is
no physical location. Offer for subscription to securities is made to investing community

The primary market deals with the issue of new instruments by the corporate sector such as
equity shares, preference shares and debt instruments. Central and State governments, various
public sector industrial units (PSUs), statutory and other authorities such as state electricity
boards and port trusts also issue bonds/debt instruments. Since 1991/92, the primary market
14

has grown fast as a result of the removal of investment restrictions in the overall economy
and a repeal of the restrictions imposed by the Capital Issues Control Act. In 1991/92,
Rs62.15 billion was raised in the primary market. This figure rose to Rs276.21 billion in
1994/ 95. Since 1995/1996, however, smaller amounts have been raised due to the overall
downtrend in the market and tighter entry barriers introduced by SEBI for investor protection.
The secondary market or stock exchange is a market for trading and settlement of securities
that have already been issued. The investors holding securities sell securities through
registered brokers/sub-brokers of the stock exchange. Investors who are desirous of
buying securities purchase securities through registered brokers/sub-brokers of the stock
exchange. It may have a physical location like a stock exchange or a trading floor.
Since 1995, trading in securities is screen-based and Internet-based trading has also made
an appearance in India. The secondary' market consists of 23 stock exchanges including the
National Stock Exchange, Over-the-Counter Exchange of India (OTCE1) and Inter
Connected Stock Exchange of India Ltd. The secondary market provides a trading place for
the securities already issued, to be bought and sold. It also provides liquidity to the initial
buyers in the primary market to reefer the securities to any interested buyer at any price, if
mutually accepted. An active secondary market actually promotes the growth of the
primary market and capital formation because investors in the primary market are assured of
a continuous market and they can liquidate their investments.

India has seen a tremendous change in the secondary market for equity. Its equity market will
most likely be comparable with the world's most advanced secondary markets within a year or
two. The key ingredients that underlie market quality in India's equity markets are:
Exchanges based on open electronic limit order book;
Nationwide integrated market with a large number of informed traders and
fluency of Short or long positions; and
No counter party risk.
15

CAPITAL MARKET
Primary Market (New Issue Market):
This method includes the data collected from the personal discussions with the
authorized clerks and members of the Exchange.

Secondary Market:
The secondary collection method includes the lectures of the superintend of the
Department of Market Operations, EDP etc, and also the data collected from the News,
Magazines of the NSE, HSE and different books issue of this study.

Capital Market Participants: There are several major players in the primary market. These
include the merchant bankers, mutual funds, financial institutions, foreign institutional
16

investors (FHs) and individual investors. In the secondary market, there are the stock brokers
(who are members of the stock exchanges), the mutual funds, financial institutions, foreign
institutional investors (FHs), and individual investors. Registrars and Transfer Agents,
Custodians and Depositories are capital market intermediaries that provide important
infrastructure services for both primary and secondary markets.
Market regulation: It is important to ensure smooth working of capital market, as it is the
arena where the players in the economic growth of the country. Various laws have been
passed from time to time to meet this objective.

The financial market in India was highly segmented until the initiation of reforms in 1992-93
on account of a variety of regulations and administered prices including barriers to entry. The
reform process was initiated with the establishment of Securities and Exchange Board of
India (SEBI). The legislative framework before SEBI came into being consisted of three major
Acts governing

The capital markets:

The Capital Issues Control Act 1947, which restricted access to the
securities market and controlled the pricing of issues.
The Companies Act, 1956, which sets out the code of conduct for the
corporate sector In relation to issue, allotment and transfer of securities,
and disclosures to be made in Public issues.
The Securities Contracts (Regulation) Act,
transactions

1956, which

regulates

in Securities through control over stock exchanges. In

addition, a number of other acts, e.g., the Public Debt Act. 1942, the Income
Tax Act, 1961, the Banking Regulation Act, 1949 have substantial bearing on
the working of the securities market.
17

Introduction to Bombay Stock Exchange

Bombay Stock Exchange Limited is the oldest stock exchange in Asia with a rich
heritage. Popularly known as "BSE", it was established as "The Native Share & Stock
Brokers Association" in 1875. It is the first stock exchange in the country to obtain
permanent recognition in 1956 from the Government of India under the Securities
Contracts (Regulation) Act, 1956.The Exchange's pivotal and pre-eminent role in the
development of the Indian capital market is widely recognized and its index, SENSEX, is
tracked worldwide. Earlier an Association of Persons (AOP), the Exchange is now
corporative entity incorporated under the provisions of the Companies
Act, 1956, pursuant to the BSE (Corporatisation and Demutualization) Scheme, 2005
notified by the Securities and Exchange Board of India (SEBI).

In terms of organization structure, the Board formulates larger policy issues and exercises
over-all control. The committees constituted by the Board are broad-based. The
Managing Director and a management team of professionals manage the day-to-day
operations of the Exchange.
The Exchange has a nation-wide reach with a presence in 417 cities and towns of India. The
systems and processes of the Exchange are designed to safeguard market integrity and
enhance transparency in operations. During the year 2004-2005, the trading volumes on the
Exchange showed robust growth.
The Exchange provides an efficient and transparent market for trading in equity, debt
instruments and derivatives. The BSE's On Line Trading System (BOLT) is a proprietary
system of the Exchange and is BS 7799-2-2002 certified. The surveillance and clearing &
settlement functions of the Exchange are ISO 9001:2000 certified.
18

Introduction to National Stock Exchange

The National Stock Exchange of India was promoted by leading financial institution at the
behest of the government of India, and was incorporated in November 1992 as a tax-paying
company. In April 1993 it was recognized as a Stock exchange under the Securities
Contracts (Regulation) Act, 1956. NSE commenced operations in the Wholesale DebtMarket (WDM) segment in June 1994. The Capital Market (Equities) segment of the NSE
commenced operations in November 1994, while operations in the Derivatives segment
commenced in June 2000.
The National Stock Exchange of India (NSE) is one of the largest and most advanced
stock markets in India. The NSE is the world's third largest stock exchange in terms of
transactions. It is located in Mumbai, the financial capital of India. The NSE VSAT has 2791
terminals that cover 334 cities across India.
NSE has remained in the forefront of modernization of India's capital and financial
markets, and its pioneering efforts include:
Setting up the first clearing corporation "National Securities Clearing Corporation
Ltd." in India. NSCCL was a landmark in providing notation on all spot equity
market (and later, derivatives market) trades in India.
Co-promoting and setting up of National Securities Depository Limited, first
depository in India. > Setting up of S&P CNX Nifty.
NSE pioneered commencement of Internet Trading in February 2000, which led
to the wide popularization of the NSE in the broker community.

19

 Being the first exchange that, in 1996, proposed exchange traded derivatives,
particularly on an equity index, in India. After four years of policy and regulatory
debate and formulation, the NSE was permitted to start trading equity derivatives
three days after the BSE.
Being the first exchange to trade ETFs (exchange traded funds) in India.

20

Introduction to Securities and Exchange Board of India (SEBI)

In 1988 the Securities and Exchange Board of India (SEBI) was established by the
Government of India through an executive resolution, and was subsequently upgraded as a
fully autonomous body (a statutory Board) in the year 1992 with the passing of the
Securities and Exchange Board of India Act (SEBI Act) on 30th January 1992. In place of
Government Control, statutory and autonomous regulatory boards with defined
responsibilities, to cover both development & regulation of the market, and independent
powers have been set up. Paradoxically this is a positive outcome of the Securities Scam of
1990-91.
The regulatory body for the investment market in India. The purpose of this board is to
maintain stable and efficient markets by creating and enforcing regulations in the market
place.
The Securities and Exchange Board of India is similar to the U.S. SEC. The SEBI is
relatively new (1992) but is a vital component in improving the quality of the financial
markets in India both to attract foreign investors and to protect Indian investors
Its main functions are providing for

Regulating the business in stock exchanges and any other securities markets
Registering and Regulating the working of stock brokers, sub-brokers, share
transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue,
merchant bankers, underwriters, portfolio managers, investment advisers and such
other intermediaries who may be associated with securities markets in any
21

manner.
Registering and Regulating the working of the depositories, participants, custodians
of securities, foreign institutional investors, credit rating agencies and such other
intermediaries as the Board may, by notification, specify in this behalf.
Registering and Regulating the working of venture capital funds and collective
investment schemes including mutual funds;
Promoting and Regulating self-regulatory organizations;
Prohibiting fraudulent and unfair trade practices relating to securities markets;
Promoting Investors' education and training of intermediaries of securities markets;
Prohibiting insider trading in securities;
Regulating substantial acquisition of shares and takeover of companies;
Calling for information from, undertaking inspection, conducting inquiries and
audits of the stock exchanges, mutual funds and other persons associated with the
securities market and intermediaries and self- regulatory organizations in the
securities market;
Calling for information and record from any bank or any other authority or board or
corporation established or constituted by or under any Central, State or
Provincial Act in respect of any transaction in securities which is under
investigation or inquiry by the Board
Performing such functions and exercising such powers under the provisions of
Securities Contracts (Regulation) Act, 1956, as may be delegated to it by the
Central Government.
22

 levying fees or other charges for carrying out the purpose of this section;
Performing such other functions as may be prescribed.

CHAPTER 3
THE COMPANY

23

24

Company Profile:

SHAREKHAN
SSKI,a veteran equities solutions company with over 8 decades of experience in the
Indian stock markets. The SSKI Group comprises of Institutional Broking and
Corporate Finance. The Institutional broking division caters to domestic and foreign
institutional investors, while the Corporate Finance Division focuses on niche areas
such as infrastructure, telecom and media, SSKI has been voted as the Top Domestic
Brokerage House in the research category, by the Euro Money survey and Asia Money
survey.

Share khan is also about focus. Sharekhan does not claim expertise in too many
things. Sharekhan's expertise lies in stocks and that's what he talks about with authority.
So when he says that investing in stocks should not be confused with trading in stocks
or a portfolio-based strategy is better than betting on a single horse, it is something that
is spoken with years of focused learning and experience in the stock markets. And these
beliefs are reflected in everything Share khan does for you!
Share khan India's leading stockbroker is the retail arm of SSKI, An organization with
over eighty years of experience in the stock market. With over 240 share shops in 110
Cities, and India's premier online trading destinations-Www.sharekhan.com, ours
customer enjoy multi-channel access at the stock markets, share khan offer u trade
execution facilities for cash as well as derivatives on the BSE & NSE and most
importantly we bring you investment advice tempered by eighty years of broking
experience Through our portal Sharekhan.com, we've been providing investors a
powerful online trading platform, the latest news, research and other knowledge-based
25

tools for over 5 years now. We have dedicated terms for fundamental and technical
research so that you get all the information your need to take the right investment
decisions. With branches and outlets across the country, our ground network is one of
the biggest in India. We have a talent pool of experienced professionals specially
designated to guide you when you need assistance, which is why investing with us is
bound to be a hassle-free experience for you! Reason why you should choose Share
Khan

EXPERIENCE:
SSKI has more than eight decades of trust and credibility in the Indian stock
market. In the Asia Money Broker's poll held recently, SSKI won the 'India's best
broking house for 2004' award. Ever since it launched share khan as its retail broking
division in February 2000, it has been providing institutional-level research and
broking services to individual investors.

TECHNOLOGY:
With our online trading account you can buy and sell shares in an instant from
any PC with an Internet connection. You will get access to our powerful inline trading
tools that will help you take complete control over your investment in shares.

ACCESSIBILITY:

In addition to our online and phone trading services, we also have a ground network of
240 share shops across 110 cities in India where you can get personalized services.
Knowledge:

26

In a business where the right information at the right time can translate into
direct profit, you get access to wide range of information on our content- rich portal,
Sharekhan.com. You will also get a useful set of knowledge-based tools that will
empower you to take informed decisions.

CONVENIENCE:
You can call our Dial-n-Trade number to get investment and execute your
transaction. We have a dedicated call-centre to provide this service via a toll-free
number from anywhere in India.

CUSTOMER SERVICE:
Our customer service team will assist you for any help that you need relating to
transactions, billing, demat and other queries, our customer service can be contacted via
a toll-free number, email or live chat on sharekhan.com

INVESTMENT ADVICE:
Sharekhan has dedicated research teams for fundamental and technical research.
Our analysts constantly track the pulse of the market and provide timely investment
advice to you in the form of daily research emails, online chat, printed reports on SMS
on your phone

A SHARE KHAN OUTLET OFFERS THE FOLLOWING SERVICES

Online BSE and NSE executions (through BOLT and NEAT terminals)
Free access to investment advice from Share khan's research team
Share khan Value Line (a fortnightly publication with reviews of
recommendations, stocks to watch out for etc
27

 Daily research reports and market review (High Noon, Eagle Eye)
Pre-market Report (Morning Cuppa)
Daily trading calls based on technical analysis
Cool trading products (Daring Derivatives, Trading Ring and Market Strategy)
Personalized advice
Live market information
Depository services: Demat and Remat transactions
Derivatives trading (Futures and Options)
Commodity trading (MCX &NCDEX)

MUTUAL FUNDS
Portfolio and management services
Internet-based online trading: Speed Trade, Speed Trade Plus All you have to do is walk
into any of their 588 share shops across 213 cities in India to get a host of trading
related services - Their friendly customer service staff will also help you with any
accounting related queries you may have.
Brief Introduction about the Services at Sharekhan

GET EVERYTHING YOU NEED AT A SHARKEHAN OUTLET

DEMAT SERVICES:
Dematerialization and trading in the demat mode is the safer and faster
alternative to the physical existence of securities. Demat as a parallel solution
offers freedom from delays, thefts, forgeries, settlement risks and paper work.
This system works through depository participants (DPs) who offer demat
services and the securities are held in the electronic form for the investor directly
by the Depository.
28

Sharekhan Depository Services offers dematerialization services to individual

and corporate investors. We have a team of professionals and the latest technological
expertise dedicated exclusively to our demat department, apart from a national network
of franchisee, making our services quick, convenient and efficient. At Sharekhan, our
commitment is to provide a complete demat solution which is simple, safe and secure

ONLINE SERVICES TO SUIT YOUR NEEDS

With a Sharekhan online trading account, you can buy and sell shares in an
instant! Anytime you like and from anywhere you like!

We were amongst the pioneers of online trading in India and have launched
sharekhan.com in February 2000.Since then, we have been at the forefront in
understanding customer needs, analyzing trends and bringing innovation in our
offerings. We have online trading products that are customized to the habits and
preferences of investors as well as traders.

You can choose the online trading account that suits your trading habits and
preferences - the Classic Account for most investors and Speed trade for active day
traders. Your Classic Account also comes with Dial-n-Trade completely free, which is
an exclusive service for trading shares by using your telephone,

CLASSIC ACCOUNT: This account allows the client to trade through our
website and is suitable for the retail investor. Our online trading website also comes
with Dial-n-Trade service that enables you to buy and sell shares by calling our
dedicated toll free number 1-600-227050.

29

SPEED TRADE: Speed Trade is a next generation online trading products that brings
the power of your broker's terminal to your PC. It is ideal for active traders who transact
frequently during movements. SPEEDTRADE is an internet-based application available
on a CD, which provides everything a trader needs on one screen, thereby, reducing the
time required to execute a trade.

KEY FEATURES OF SPEED TRADE:

Single Screen Trading Terminal

Real - time Streaming Quotes

Live Tic-by-Tic Intra - day Charting
Instant Order / Trade Confirmations in the same window
Hot keys similar to Broker's Terminal
Customized Alerts based on multiple Parameters
Back-up Facility to Place Trading on Direct Phone Lines

FEATURES
Trading a/c with Demat a/c.
Online orders on Phone.
Timely Advice and Research Reports.
Banking gateways with five banks.
(HDFC, CITIBANK, UTI, IDBI, OBC)
Live streaming quotes.
First year free demat a/c.
Freedom from paper work.
Trade from any net enabled PC.
After- hour orders
30

 Mobile Alerts*
Apply IPO'S Online*.

RESEARCH- the SCIENCE of INVESTING

Research and in-depth knowledge of markets provide better analysis that
speculations or reactions to rumors. Our teams of dedicated analysts are therefore,
constantly at work to track performance and trends and determine and winners. That's
why all our trading - products have extremely high success rates! Our research products
are tailor-made to suit all your needs.

LONG-TERM INVESTING
Intra-day & short-term trading
High-income yields
Hedging products and lots more

INVESTING IN MUTUAL FUNDS THROUGH SHARE KHAN

We're glad to announce that you will now be able to invest in Mutual Funds
through us! We've started this service for a few mutual funds, and in the near future will
be expanding our scope to include a whole lot more. Applying for a mutual fund
through us is open to everybody, regardless of whether you are a Sharekhan customer.
To invest in a fund, all you have to do is download the application form, print it out, fill
it in and send it over to us. We'll do the rest for you

31

INVESTING IN COMMODITY

You can place your orders through our dealers across all our branch/franchisee
Toll free number 39702090 between 10 - 12 pm till market closes If you require
terminal for MCX/NCDEX or both need RS1 lac as margin money.

KEY BENEFITS OF COMMODITIES SHAREKHAN

You are getting 20time expose in MCX &10 time in NCDEX depends on
commodity to open an account We have sms facility where u getting market
information as well as buy/sell call You are also getting yahoo chat, where our
dealer/RM are always help for market information as well as buy/sell call.
PORTFOLIO MANAGEMENT SERVICES
Can you analyze the prices of 1,500 shares every morning? Can you afford to
gamble only on the recommendations from your friends and the information overload
from magazines and financial dailies? And, of course, more importantly, if you happen
to be a High Net worth Individual, do you have the time to judge which advice is
reliable, authentic and has the least chance of failure?
With the Sharekhan Team Managing Your Portfolio, you can be assured that
your investments are in safe hands!
We follow a multi-disciplined approach incorporating quantitative analysis,
fundamental analysis and technical analysis. This multi-pronged approach enables us to
provide risk-controlled returns for you.
Right from choosing the combination of stocks most suitable for you based on your risk
appetite to monitoring their movements and discussing them with you at special events.
This is how we make investing completely hassle-free for you
32

CHAPTER - 4
DATA ANALYSIS AND PRESENTATION

33

CAPITAL MARKET
MUTUAL FUNDS
History
When three Boston securities executives pooled their money together in 1924 to create
the first mutual fund, they had no idea how popular mutual funds would become.
The idea of pooling money together for investing purposes started in Europe in the mid1800s. The first pooled fund in the U.S. was created in 1893 for the faculty and staff of
Harvard University On March 21 st, 1924 the first official mutual fund was born. It was
called the Massachusetts Investors Trust.
The mutual fund industry in India started in 1963 with the formation of Unit Trust of
India, at the initiative of the Government of India and Reserve Bank the. Though the
growth was slow, but it accelerated from the year 1987 when non-UTI players entered
the industry.

Definition
A mutual fund is nothing more than a collection of stocks and/or bonds. You can think
of a mutual fund as a company that brings together a group of people and invests their
money in stocks, bonds, and other securities. Each investor owns shares, which
represent a portion of the holdings of the fund.
A mutual fund is simply a financial intermediary that allows a group of investors to
pool their money together with a predetermined investment objective. The mutual fund
will have a fund manager who is responsible for investing the pooled money into
specific securities (usually stocks or bonds). When you invest in a mutual fund, you are
buying shares (or portions) of the mutual fund and become a shareholder of the fund.
34

Mutual funds are one of the best investments ever created because they are very cost
efficient and very easy to invest in (you don't have to figure out which stocks or bonds
to buy).
By pooling money together in a mutual fund, investors can purchase stocks or bonds
with much lower trading costs than if they tried to do it on their own. But the biggest
advantage to mutual funds is diversification.
You

can

make

money

from

mutual

fund

in

three

ways:

1) Income is earned from dividends on stocks and interest on bonds. A fund pays out
nearly all of the income it receives over the year to fund owners in the form of a
distribution.
2) If the fund sells securities that have increased in price, the fund has a capital gain.
Most funds also pass on these gains to investors in a distribution.
3) If fund holdings increase in price but are not sold by the fund manager, the fund's
shares increase in price. You can then sell your mutual fund shares for a profit
Advantages of investing in mutual funds
..Professional management .Investment diversification
..Liquidity
..Explicit investment goals
..Simple reinvestment programs
Disadvantages of investing in mutual funds:
- -Many funds charge hefty fees, leading to lower overall returns.
-- Over time, statistics have shown that most actively managed funds tend to Under
perform their benchmark averages.
-Mutual funds cannot be bought or sold during regular trading hours, but instead are
priced just once per day.
35

IPO
IPO - initial public offering - Initial Public Offering or IPO is the first sale of stock by
a private company to the public. IPO are often smaller, younger companies seeking
capital to expand their business.

An initial public offering (IPO) is the first sale of a corporation's common shares to
public investors. The main purpose of an IPO is to raise capital for the corporation.
While IPO's are effective at raising capital, they also impose heavy legal compliance
and reporting requirements. The term only refers to the first public issuance of a
company's shares; any later public issuance of shares is referred to as a Secondary
Market Offering.

A company's first sale of stock to the public. Securities offered in an IPO are often,
but not always, those of young, small companies seeking outside equity capital and a
public market for their stock. Investors purchasing stock in IPO's generally must be
prepared to accept very large risks for the possibility of large gains. IPO's by investment
companies (closed end funds) usually contain underwriting fees, which represent a load
to buyers.

36

DERIVATIVES
Introduction
The term "Derivative" indicates that it has no independent value, i.e. its value is
entirely "derived" from the value of the underlying asset. The underlying asset can be
securities, commodities, bullion, currency, livestock or anything else. In other words,
Derivative means a forward," future, option or any other hybrid contract of pre
determined fixed duration, linked for the purpose of contract fulfillment to the value
of a specified real or financial asset or to an index of securities.
With Securities Laws (Second Amendment) Act, 1999, Derivatives has been included
in the definition of Securities. The term Derivative has been defined in Securities
Contracts (Regulations) Act, as:-

A Derivative includes: -

A security derived from a debt instrument, share, loan, whether secured or

unsecured, risk instrument or contract for differences or any other form of
security;

A contract which derives its value from the prices, or index of prices, of
underlying securities;

37

Introduction of Derivatives in India

The initial steps to launch derivatives were taken in 1995 with the introduction of the
Securities Laws (Amendment) Ordinance, 1995 that withdrew the prohibition on
trading in options on securities in the Indian stock market. In November 1996, a 24member committee was set up by the Securities Exchange Board of India (SEBI) under
the chairmanship of LC Gupta to develop an appropriate regulatory framework for
derivatives trading. The committee recommended that the regulatory framework
applicable to the trading of securities would also govern the trading of derivatives.
The plan to introduce derivatives in India was initially mooted by the National Stock
Exchange (NSE) in 1995. The main purpose of this plan was to encourage greater
participation of foreign institutional investors (FIIs) in the Indian stock exchanges.
Derivatives were introduced in a phased manner. Initially, trading was restricted to
index futures contracts based on the S&P CNX Nifty Index and BSE-30 (Sensex)
Index. Later, trading was extended to index options (based on the same indices) in June
2001, and options on individual securities in July 2001. SEBI also permitted the launch
of futures contracts on individual stocks in November 2001...
On June 9, 2000, the Bombay Stock Exchange (BSE) introduced India's first derivative
instrument - the BSE-30 (Sensex) index futures. It was introduced with three month
trading cycle - the near month (one), the next month (two) and the far month (three).
The National Stock Exchange (NSE) followed a few days later, by launching the S&P
CNX Nifty index futures on June 12, 2000.
. In spite of these encouraging developments, Industry analysts felt that the derivatives
market had not yet realized its full potential. Analysts pointed out that the equity
38

derivative markets on the BSE and NSE had been limited to only four products - index
futures, index options and individual stock futures and options which were limited to
certain select stocks.
Participants in Derivatives Market
Hedgers
Hedgers are those who protect themselves from the risk associated with the price of an
asset by using derivatives. A person keeps a close watch upon the prices discovered in
trading and when the comfortable price is reflected according to his wants, he sells
futures contracts. In this way he gets an assured fixed price of his produce. In general,
hedgers use futures for protection against adverse future price movements in the
underlying cash commodity. Hedgers are often businesses, or individuals, who at one
point or another deal in the underlying cash commodity.

Speculators
Speculators are somewhat like a middleman. They are never interested in actual owing
the commodity. They will just buy from one end and sell it to the other in anticipation of
future price movements. They actually bet on the future movement in the price of an
asset.
They are the second major group of futures players. These participants include
independent floor traders and investors. They handle trades for their personal clients or
brokerage firms. Buying a futures contract in anticipation of price increases is known as
'going long'. Selling a futures contract in anticipation of a price decrease is known as
'going short'. Speculative participation in futures trading has increased with the
availability of alternative methods of participation.

39

Arbitrators:
According to dictionary definition, a person who has been officially chosen to make a
decision between two people or groups who do not agree is known as Arbitrator. In
commodity market Arbitrators are the people who take the advantage of a discrepancy
between prices in two different markets. If he finds future prices of a commodity
edging out with the cash price, he will take offsetting positions in both the markets to
lock in a profit. Moreover the commodity futures investor is not charged interest on the
difference between margin and the full contract value.
What is the structure of Derivative Markets in India?

Derivative trading in India takes can place either on a separate and independent
Derivative Exchange or on a separate segment of an existing Stock Exchange.
Derivative Exchange/Segment function as a Self-Regulatory Organization (SRO) and
SEBI acts as the oversight regulator. The clearing & settlement of all trades on the
Derivative Exchange/Segment would have to be through a Clearing Corporation/House,
which is independent in governance and membership from the Derivative
Exchange/Segment

What is a Futures Contract?

Futures Contract means a legally binding agreement to buy or sell the underlying
security on a future date. Future contracts are the organized/standardized contracts in
terms of quantity, quality (in case of commodities), delivery time and place for
settlement on any date in future. The contract expires on a pre-specified date which is
called the expiry date of the contract. On expiry, futures can be settled by delivery of

40

the underlying asset or cash. Cash settlement enables the settlement of obligations
arising out of the future/option contract in cash.

What is an Option contract?

Options Contract is a type of Derivatives Contract, which gives the buyer/holder of the
contract the right (but not the obligation) to buy/sell the underlying asset at a
predetermined price within or at end of a specified period. The buyer / holder of the
option purchase the right from the seller/writer for a consideration which is called the
premium. The seller/writer of an option is obligated to settle the option as per the terms
of the contract when the buyer/holder exercises his right. The underlying asset could
include securities, an index of prices of securities etc.
What are Index Futures and Index Option Contracts?

Futures contract based on an index i.e. the underlying asset is the index, are known as
Index Futures Contracts. For example, futures contract on NIFTY Index and BSE-30
Index. These contracts derive their value from the value of the underlying index
Similarly, the options contracts, which are based on some index, are known as Index
options contract. However, unlike Index Futures, the buyer of Index Option Contracts
has only the right but not the obligation to buy / sell the underlying index on expiry.
Index Option Contracts are generally European Style options i.e. they can be exercised /
assigned only on the expiry date.
An Index in turn derives its value from the prices of securities that constitute the index
and is created to represent the sentiments of the market as a whole or of a particular
sector of the economy. Indices that represent the whole market are broad based indices
and those that represent a particular sector are sectoral indices.
41

 In the beginning futures and options were permitted only on S&P Nifty and
BSE Sensex. Subsequently, sectoral indices were also permitted for
derivatives trading subject to fulfilling the eligibility criteria. Derivative
contracts may be permitted on an index if 80% of the index constituents are
individually eligible for derivatives trading. However, no single ineligible
stock in the index shall have a weight age of more than 5% in the index. The
index is required to fulfill the eligibility criteria even after derivatives
trading on the index have begun. If the index does not fulfill the criteria for 3
consecutive months, then derivative contracts on such index would be
discontinued.
By its very nature, index cannot be delivered on maturity of the Index
futures or Index option contracts therefore, these contracts are essentially
cash settled on Expiry.
What is the regulatory framework of Derivatives markets in India?
With the amendment in the definition of 'securities' under SC(R) A (to include
derivative contracts in the definition of securities), derivatives trading takes place under
the provisions of the Securities Contracts (Regulation) Act, 1956 and the Securities and
Exchange Board of India Act, 1992.

Dr. L.C Gupta Committee constituted by SEBI had laid down the regulatory framework
for derivative trading in India. SEBI has also framed suggestive bye-law for Derivative
Exchanges/Segments and their Clearing Corporation/House, which lay's down the
provisions for trading and settlement of derivative contracts. The Rules, Bye-laws &
Regulations of the Derivative Segment of the Exchanges and their Clearing
Corporation/House have to be framed in line with the suggestive Bye-laws. SEBI has
also laid the eligibility conditions for Derivative Exchange/Segment and its Clearing
42

Corporation/House. The eligibility conditions have been framed to ensure that

Derivative Exchange/Segment & Clearing Corporation/House provide a transparent
trading environment, safety & integrity and provide facilities for redressal of investor
grievances. Some of the important eligibility conditions are Derivative trading to take place through an on-line screen based Trading System.
The Derivatives Exchange/Segment shall have on-line surveillance capability to
monitor positions, prices, and volumes on a real time basis so as to deter market
manipulation.
The Derivatives Exchange/ Segment should have arrangements for dissemination
of information about trades, quantities and quotes on a real time basis through
atleast two information-vending networks, which are easily accessible to investors
across the country.
The Derivatives Exchange/Segment should have arbitration and investor
Grievances redressal mechanism operative from all the four areas / regions of the
country.
The Derivatives Exchange/Segment should have satisfactory system of
monitoring investor complaints and preventing irregularities in trading.
The Derivative Segment of the Exchange would have a separate Investor Protection
Fund.
The Clearing Corporation/House shall perform full novation, i.e., the Clearing
Corporation/House shall interpose itself between both legs of every trade, becoming
the legal counterparty to both or alternatively should provide an
Unconditional guarantee for settlement of all trades.
The Clearing Corporation/House shall have the capacity to monitor the overall
position of Members across both derivatives market and the underlying securities
43

market for those Members who are participating in both.

The level of initial margin on Index Futures Contracts shall be related to the risk of
loss on the position. The concept of value-at-risk shall be used in calculating
required level of initial margins. The initial margins should be large enough tocover
the one-day loss that can be encountered on the position on 99% of the days.
The Clearing Corporation/House shall establish facilities for electronic funds
transfer (EFT) for swift movement of margin payments.
In the event of a Member defaulting in meeting its liabilities, the Clearing
Corporation/House shall transfer client positions and assets to another solvent
Member or close-out all open positions.
The Clearing Corporation/House should have capabilities to segregate initial
margins deposited by Clearing Members for trades on their own account and on
account of his client. The Clearing Corporation/House shall hold the clients' margin
money in trust for the client purposes only and should not allow its
diversion for any other purpose.
The Clearing Corporation/House shall have a separate Trade Guarantee Fund for the
trades executed on Derivative Exchange / Segment.
Presently, SEBI has permitted Derivative Trading on the Derivative Segment of
BSE and the F&O Segment of NSE.

44

DEFINITION
A share represents a participation in the capital of a company. A shareholder is in theory
a partner in the company. It gives him the rights, proportionally to his holdings, to
participate in the management of the company, to receive the profits and to dispose of
the net assets of the company.

The above definition describes only the general principles and the effective rights of the
shareholder depends of shares type.

The shareholder exercises his rights through the general meetings of the company by
appointing or revoking the management, the supervisory board, and/or other bodies.

OBJECTIVES
In recent years, a lot of individual investors have become disillusioned with the stock
market. They often fear its increased volatility, the influences of corporate raiders and
insider trading, and the overwhelming presence of mammoth investment institutions.
For many the stock market has become a place where common sense has been
supplanted by irrational price movements.
But behind this smokescreen, we strongly believe that the stock market is still a market
of stocks and that quality companies that are undervalued can still by bought and held to
produce above average profits.
By presenting some techniques, we will try to prove you that success in the stock
market is much more of common sense and discipline than of gurus insight.

45

Introduction to investing in shares

If youre planning to make your own share investments, be prepared for a lot of hard
work. But, hopefully, youll also have some fund and financial success along the way.
Each of the following pages contains a number of topics that represent some of the
information you should have and consider before making a decision on which shares to
invest in.
Shares and the economic environment
Information about the economic environment that might affect your share investments
includes
Industry sector understand the industry sector in which the company operates, for
example, retail, property, financial, IT & T, forestry, agriculture or listed trusts.
Basic economic knowledge understand the impact of economic events on the
company. These can range from macro economics, including interest, exchange and
inflation rates, through to micro policy, such as tariffs.
Government Understanding the Governments economic direction may help alert you
to future policy decisions.
Shares and company specific information
Information relevant to the individual company that you should look into includes :

Annual report know what to read and whats being said between the lines.

Directors who are the directors and what are their qualifications for the
directorship of this company?

Management team a high quality management team is one of the key success
drivers for a business.

Debt levels understand the risks and benefits of varying degrees of debt.

46

Cash flow understand why cash flow is more important than profit, and how to
find the right information.

Market position what position does the company have in its sector?

Branding understand the importance of brands and the associated difficulties

in measuring brand value.

Technology how important is technology to the business?

Competition what is the competition? Where are future threats? Is the

company prepared for them?

Ratios learn which financial ratios you should use in measuring a business,
how to calculate them and where to find the information.

Sustainable profitability the value of a company is based on its future

sustainable earnings. Learn what that means and how to prepare your own
analysis.

Abnormal items do companies really report the good news above the line as an
abnormal item?

Shares ad investor specific information

Information that may be useful as you build your investment portfolio includes:

Volatility learn the importance of riding the waves of volatility.

Income or growth decide what you need, then learn how to identify a share
which will deliver the required result.

Risk adversity you need to understand your level of risk adversity, before
building a share portfolio which might give you sleepless nights.

Time in the market understand why it is that time in the market will create
wealth, without trying to second guess the market.

47

Taxation what will the taxation implications be of your share investment

decisions?

Pitfalls what to watch out for, including tips from friends, family and share
brokers.

Resources the internet delivers to your PC an unlimited array of information

and resources.

Shares and shareholders

Types of shares
A company may have many different types of shares that come with different conditions
and rights.
There are four main types of shares:

Ordinary shares are standard shares with no special rights or restrictions. They
have the potential to give the highest financial gains, but also have the highest
risk. Ordinary shareholders are the last to be paid if the company is wound up.

Preference shares typically carry a right that gives the holder preferential
treatment when annual dividends are distributed to shareholders. Shares in this
category have a fixed value, which means that a shareholder would not benefit
from an increase in the business profits. However, usually they have rights to
their dividend ahead of ordinary shareholders if the business is in trouble. Also,
where a business is wound up, they are likely to be repaid the par or nominal
value of shares ahead of ordinary shareholders.

Cumulative preference shares give holders the right that, if a dividend cannot
be paid one year, it will be carried forward to successive years, Dividends on
cumulative preferred shares must be paid, despite the earning levels of the
business.
48

Redeemable shares come with an agreement that the company can buy them
back at a future date this can be at a fixed date or at the choice of the business.
A company cannot issue only redeemable shares.

Equity finance introduction

Introduction
What is equity?
Equity is the term commonly used to describe the ordinary share capital of a business.
Ordinary shares in the equity capital of a business entitle the holders to all distributed
profits the holders of debentures and preference shares have been paid.
Ordinary (equity) shares
Ordinary shares are issued to the owners of a company.
The market value of a companys shares has little (if relationship to their nominal or
face value. The market value of a companys shares is determined the price another
investor is prepared to pay for them.
Deferred ordinary shares. These are a form of ordinary shares, which are entitle to a
dividend only after a certain date or only if profits rise above a cel amount.
Why might a company issue ordinary shares?
Reasons:
(1) The company might want to raise more cash
For example might be needed for the expansion of a companys operations. If, for
example, a comp with 500,000 ordinary shares in issue decides to issue 125,000 new
shares to raise cash, should it to the new shares to existing shareholders, or should it sell
them to new shareholders instead?
Where a company sells the new shares to existing shareholders in proportion to their
exist shareholding in the company, this is known as a rights issue.

49

(2) The company might want to issue new shares partly to raise cash but more
importantly float its shares on a stock market.
When a UK company is floated, it must make available a minimum proportion of its
shares to general investing public.
(3) The company might issue new shares to the shareholders of another company,
in order to take it over
There are many examples of business that use their high share price as a way of making
an offer other businesses. The shareholders of the target business being acquired
received shares in the business and perhaps also some cash.
Sources of equity finance
There are three main methods of raising equity:
(1) Retained profits: i.e. retaining profits, rather than paying them out as
dividends. This is the important source of equity.
(2) Rights issues : i.e. an issue of new shares. After retained profits, rights issues
are the next important source.
(3) New issues of shares to the public: i.e. an issue of new shares to new
shareholders. IN total in UK, this is the least important source of equity finance.
Issue procedures
This section describes the procedural aspects of raising of equity shares and securities
convertible/exchangeable into equity shares prescribed by the Securities and Exchange
Board of India (SEBI) in terms of the following : (i) eligibility norms, (ii) pricing of
issues, (iii) promoters contribution and lock-in requirements, (iv) initial public offer
(IPO) through book building, (v) green shoe option, (vi) initial public offer through
stock exchange on-line system (E-IPO) and (vii) preferential issues.

Eligibility Norms for Public Issues

50

The companies issuing securities (capital) through offer document, this is, (i) prospectus
in the case of a public issue or offer for sale and (ii) letter of offer in case of a rights
issue, should satisfy the following at the time of filing draft offer document with the
SEBI and also at the timing of filing the final offer document with the Registrar of
Companies (ROCs)/designated stock exchange.
Filing of offer document In case of public issue of securities y any company as well as
any time of securities by a listed company through a rights issue in excess of Rs.50
lakh., a draft prospectus should be filed with the SEBI through an eligible registered
merchant banker, at least 21 days prior to filing it with the Registrar of Companies
(ROCs). Although under no obligation to do so, if the SEBI specifies any changes in the
draft prospectus within 21 days, the issuer/lead merchant banker should carry them out
before filing it with ROCs. However, companies prohibited under any order/direction of
the SEBI from accessing the capital market cannot issue any security.
The companies intending to issue securities to public issue should apply for
listing them in the stock exchange(s). Moreover, all the issuing companies must (i) enter
into an agreement with a depository registered with the SEBI under the SEBI
Depositories and Participants Regulation, 1996, for dematerialization of securities
already issued/securities proposed to be issued to the public/existing shareholders and
(ii) give an option to subscribers/shareholders/investors to receive security certificates
or hold securities in a dematerialized form with a depository. The eligibility norms for
issue of equity shares and convertible securities relate to (1) unlisted companies and (2)
listed companies.

Initial Public Offerings (IPOs)/Offer for Sale by Unlisted Companies An unlisted

company can make an IPO? offer for sale of equity shares/any other security convertible

51

into, or exchangeable with, equity shares at a later date only if it meets all the following
conditions
(a) It has net tangible assets (i.e. total net assets, excluding intangible assets) of
at least Rs. 3 percent should be in monetary assets; if more than 50 per cent
of the net tangible assets are held in monetary assets, the company should
have firm commitments to deploy the excess in its business/project (i.e. the
object for which the money is proposed to be raise to cover the objects of the
issue).
(b)

It has a track record of distributable profit in terms of Section 205 of the

Companies Act for at least 3 out of the immediately 5 years; extraordinary items should
not be considered to compute the distributable profits. IN case of (i) partnership firms
converted into companies and (ii) an unlisted company formed out of division of a an
existing company, the track record of distributable profits of the firm/division spun off
would be considered only if their financial statements for the relevant/respective years
conform to, and are revised in the format prescribed by, the Companies Act and also
comely with the following : (a) Adequate disclosures as per Schedule VI of the
companies Act and also comply with the following : (a) Adequate disclosures as per
Schedule VI of the companies Act are made in the; and (b) They are duly certified by a
chartered accountant to the effect that (i) the accounts are revised or otherwise and the
disclosures are in accordance with the provisions of Schedule VI and (ii) the accounting
standards of the Institute of Chartered Accountants of India (ICAI) have been followed,
and the financial statements present a true and fair picture of the firms/divisions spun
off accounts.
(c)

It has a net worth (i.e. the aggregate value of paid-up equity capital and free

reserves (excluding revaluation reserves) minus the aggregate value of accumulated

losses and deferred expenditure not written off (including miscellaneous expenses not
52

written off) of at least Rs. 1 crore in each of the preceding 3 full years (of 12 months
each).
(d) In case of change of its name within the last one year, at lest 50 percent of the
revenue for the preceding one full year is earned by the company from the activity
suggested by the new name and
(e)The aggregate of the proposed issue and all previous issues made in the same
financial year in terms of size (i.e. offer through offer document plus firm allotment and
promoters contribution through the offer document) does not exceed 5 times its pre-issue
net worth as per the audited balance sheet of the financial year.
If an unlisted company does not comply with any of the five conditions specified
above, it may make an IPO of equity shares/security convertible into, exchangeable
with, equity at a later date, only if it satisfies both the following conditions: CD The
issue is made through the book-building process with at least 50 per cent of the issue
size being allotted to the Qualified Institutional Buyers (QIBs) failing which the full
subscription would be refunded; or the project has at least 15 per cent participation by
banks/financial institutions of which at least 10 per cent comes from the appraisers. In
addition, at least 10 per cent of the issue size should be allotted to the QIBs failing
which the full subscription should be refunded; and The minimum post-issue issue face
value of capital of the company would be Rs 10 crore or there would be a compulsory
market-making for at least 2 years from the-date of listing of the shares subject to the
following:
Market makers undertake to (0 offer buy and sell quotes for a minimum depth of
300 shares and (ii) ensure that the bid-ask spread (i.e. difference between
quotations for sale and purchase) for their quotes would not at any time exceed 10
per cent;

53

 The inventory of the market-makers on each of such stock exchanges, as on the

date of allotment of securities, would be at least 5 per cent of the proposed issue of
the company.
A QIB means (1) a public financial institution (PFI) in terms of Section 4-A of the
Companies Act. (2) banks, (3) mutual funds, (4) foreign institutional investors (FIIs)
registered with the SEBI, (5) multilateral and bilateral development finance
institutions, (6) venture capital funds (VCFs) registered with the SEBI. (8) state industry
development corporations (SIDCs), (9) insurance companies registered with Insurance
Regulatory and Development Authority (IRDA), (10) provident funds with minimum
corpus of Rs 25 crore and (11) pension funds with minimum corpus of Rs 25 crore.
An unlisted company satisfying all the conditions outlined above can allot equity
shares/ securities convertible into or exchangeable with, equity shares at a later date in
a public issue or offer for sale only if the number of the prospective allotters is not less
than 1,000.
Public Issue by Listed Companies All listed companies are eligible to make public
issue of equity shares/securities convertible into, or exchangeable with equity shares at
a later date on the condition that the issue size in terms of the aggregate of the
proposed issue and all previous issues made in the same financial year (i.e. offer
through offer document plus firm allotment plus promoters' contribution through the
offer document) does not exceed 5 times its pre-issue networth as per the audited
balance sheet of the last financial year. In case of a change in the name of the issuer
company within the last one year (reckoned from the date of filing of the offer
document), the revenue accounted for by the activity suggested by the new name
should not be less than 50 per cent of its total revenue in the preceding one full year.

54

A listed company which does not fulfil the above conditions, would be eligible to
make a public issue through book-building process with the same conditions as are
applicable to unlisted companies
Exemptions The eligibility norms specified above for IPOs/offer for sale by unlisted
companies and public issues by listed companies are not applicable in the following
cases:
Private/public sector banks
Infrastructure companies, wholly engaged in the business of developing,
maintaining and operating infrastructure facility within the meaning of Section
10(23-G) of the Income Tax Act (a), whose project has been appraised by a
(PFI)/Infrastructure Development Finance Company (IDFO/Infrastructure Leasing
and Financial Services Ltd (ILFS) or a bank which was earlier a PFI and (b) not
less than 5 per cent of the project cost has been financed by any of the appraising
institutions jointly/severally by way of loan/subscription to equity or combination
of both.
Rights issue by a listed company.
1. Equity Shares
Issue of Equity Shares (also known as Ordinary or Common shares) is undertaken by a
joint stock corporation of raising long term capital from the investors who are interested
in the participation /sharing of the final profit or loss. Hence the funds raised through
issue of equity shares are called Owners capital since the holders of these shares are the
real owners.
Equity is a source of permanent capital and are not redeemed during the life time of the
company. The equity shareholders are entitle for the dividend, rate of which is decide by
the board of directors of the company. Hence it is known as Variable Income Security.
55

Features of Equity Shares

i.

Maturity
Equity Shareholders can demand their capital only at the time of liquidation of
the company and after the claims of others, including preference share holders
are settled.

ii.

Claims / Right to Income

Equity shareholders have a residual claim on the income of the company. The
distribution and the rate of dividend to equity shareholders, is left to the
discretion of the Board of Directors of the company under the Companies Act,
1956.

iii.

Claim on Assets
In the event of liquidation of the company, priority is given to creditors and
preferred stock holders in settling the claims. The equity shareholders are
entitled for all whatever left only after meeting all the other claims.

iv.

Voting Rights and Control

Every Equity shareholder has voting right equivalent to the number of shares
held on resolutions in the meetings of the company.

v.

Pre-emptive Right
This is a right of the existing shareholder to purchase new shares in
proportionate to the number of shares held. As per Section 81 of the Companies
Act, 1956, the new shares shall be offered in proportion to existing equity
shareholders.

56

Advantages of Equity Shares

1. Equity shares do not create any obligation to pay fixed rate of dividend.
2. Equity Shares provide permanent source of capital since it need not be repaid till
the company is in existence.
3. Equity shares do not create any charge over the assets of the company.
Disadvantage of Equity Shares
1. More Equity Share Capital issued means less utilization of trading on equity.
2. As equity capital can not be redeemed, there is danger of over capitalization
3. Investors desirous of investing in safe securities with fixed income do not go for
equity shares.

57

VALUATION
Valuation is the process that links risk and return to determine the worth of an asset. It
can be applied to expected benefits from real/physical as well as financial
assets/securities to determine their worth at a given point of time. The key inputs to the
valuation process are i) expected returns in terms of cash flows together with their
timing and ii) risk in terms of the required return. The value of an asset depends on the
return (cash flow) it is expected to provide over the holding/ownership period. The cash
flow stream can be 1) annual, 2) intermittent and 3) even one-time. IN addition to the
total cash flow estimates, their timing/pattern (seamount year-wise) is also required to
identify the return expected from the bond/share. The required return is used in the
valuation process to incorporate risk into the analysis/exercise. Risk denotes the chance
that an expected outcome (return/cash flow) would not be realized. The level of risk
associated with a given cash flow/return has a significant bearing on its value, that is,
the greater the risk, the lower the value & vice versa. Higher risk can be incorporated
into the valuation analysis by using a higher required/capitalization/discount rate to
determine the present value.
Valuation of ordinary/Equity shares:
The ordinary equity shareholders buy/hold shares in expectation of periodic cash
dividends and an increasing share value. They would buy a share when it is under
valued (i.e., its true value is more than its market price) and sell it when its market price
is more than its true value (i.e., it is overvalued). The value of a share is equal to the
present value of all future dividends it is expected to provide over an infinite time
horizon.

P=

D1
(1+ke)1 +

+
D2
+

2
(1+ke) +
(1+ke)

58

Where
P = Value of shares
Dt = Per share dividend expected at the end of year, t
Te = required return on share

The equation is designed to computer the value of shares with reference to the
expected growth pattern of future dividends and the appropriate discount rate.

EQUITY VALUATION
The outcome of the corporate shareholding valuation service is a fair and unbiased
opinion on the equity (a shareholding package) value on the market. The opinion may
be delivered in a form of verbal advice, a written tentative conclusion, or a standard
valuation report in a written form.
Equity valuations are relevant in the instance of:

Sale or purchase of a business;

Using the equity to make a non-monetary (property) contribution to a limited

company, which is being established or expanded;

The rate of exchange of the shares of a corporation under reorganization (merger

or split-up) must be grounded;

A court of law or bailiff action;

It is a request of the owner of the property or the customer of the valuation.

Valuation means the intrinsic worth of the company. There are various methods through
which one can measure the intrinsic worth of a company.

59

Net Asset Value (NAV)

NAV or Book value is one of the most commonly used methods of valuation. As the
name suggests, it is the net value of all the assets of the company. If you divide it by the
number of outstanding shares, you get the NAV per share.
One way to calculate NAV is to divide the net worth of the company by the total
number of outstanding shares.
NAV can also be calculated by adding all the assets and subtracting all the outside
liabilities from them. This will again boil down to net wroth only. One can use any of
the two methods to find out NAV.
One can compare the NAV with the going market price while taking investment
decisions.
Discounted Cash Flows Method (DCF)
DCF is the most widely used technique to value a company. It takes into consideration
the cash flows arising to the company and also the time value of money. The cash flows
are calculated for a particular period of time. The time period is fixed taking into
consideration various factors. These cash flows are discounted to the present at the cost
of capital of the company. These discounted cash flows are then divided by the total
number of outstanding shares to get the intrinsic worth per share.
The concept of a cost of equity
The cost of equity is the cost to the company of providing equity holders with the return
they require on their investment.
The primary financial objective is to maximize the return to equity shareholders. This
return is as the future dividend yield and capital growth.
In practice, this return will be such as to provide new shareholders with the same future
returns as existing shareholders expect to obtain on their investment at market values.

60

Anticipated rate of return on existing equity

The anticipated rate of return on a share acquired in the market consists of two
components :
Component I - Dividends paid until share sold
Component 2 Price when sold
IN this sense, the returns are directly analogues to those on a debenture, with dividends
replacing interest and sale price replacing redemption price.
Applying the concept of compound interest, in making a purchase decision it is assumed
that the investor discounts future receipts at a personal discount rate (or personal rate of
time preference).

In order to make a purchase decision, the shareholder must believe the price is below
the value of the receipts, i.e., Current price, P0 < Dividends to sale + Sale price
Discounted t rate I
Algebraically, if the share is held for n years then sold at a price Pn and annual
dividends to year n are D1, D2, D3, Dn
Then :
Po <D1(l+i)1 + D2/(l+i)2 + D3/(l+i)3 + (Dn+Pn)/(l+i)n

By similar logic, the seller of the share must believe that

Po <D1(l+i)1 + D2/(l+i)2 + D3/(l+i)3 + (Dn+Pn)/(l+i)n

These different views will occur for two reasons
(a) Different forecasts for D1, D2 etc and for Pn by the different investors.
61

(b) Different discount rates being applied by different investors.

However, since the price of shares is normally in equilibrium, for the majority of
investors who are not actively trading in that security :

Po = <D1(l+i)1 + D2/(l+i)2 + D3/(l+i)3 + (Dn+Pn)/(l+i)n

Limitations of the above valuation model

It is important to appreciate that there are a number of problems and specific
assumptions in this model
(a) Anticipated value for dividends and prices all of the dividends and prices used
in the model are the investors estimates of the future.
(b) Assumption of investor rationality the model assumes investors act rationally
and make their decisions about share transactions on the basis of financial
evaluation.
(c) Application of discounting - it assumes that the conventional compound interest
approach equates cash flows at different points in time.
(d) Share pries are ex div
(e) Dividends are paid annually with the next dividend payable in one year.
The dividend valuation model
The dividend valuation model is a development of the share valuation model described
above.
The important feature of the dividend valuation model is the recognition of the fact that
shares are in themselves perpetuities. Individual investors may buy or sell them, but
only very exceptionally are they actually redeemed.

62

One Period Valuation Model

To value a stock, you first find the present discounted value of the expected cash
flows.

P0 = Div1/(1+ke) + P1/(1+ke) where

P0 = The current price of the stock

Div = the dividend paid at the end of year 1

Ke = required return on equity investments

P1 = the price at the end of period one

P0 = Div1/(l+ke) + P1/(l+ke)

Generalized Dividend Valuation Model

The one period model can be extended to any number of periods.
P0 = D1(l+ke)l + D2/(l+ke)2++Dn/(l+ke)n + Pn/(l+ke)n

If Pn is far in the future, it will not affect P0. Therefore, the model can be rewritten as :
P0 = S Dt/(l + ke) t

The model says that the price of a stock is determined only by the present value of the
dividends.

If a stock does not currently pay dividends, it is assumed that it will someday after the
rapid growth phase of its life cycle is over.
Computing the present value of an infinite stream of dividends can be difficult.
Simplified models have been developed to make the calculations easier.

63

The Gordon Growth Model

P0 = D0(l+g)1 + D0(l+g)2 + . + D0(l+g)

(l+ke)1 (l+ke)2 (l+ke)

where
D0 = the most recent dividend paid
g = the expected growth rate in dividends
ke = the required return on equity investments
The model can be simplified algebraically to read :

P0 = D0 (l+g) D1
(ke g) (ke - g)

Assumptions:
Dividends continue to grow at a constant rate for an extended period of time.
The growth rate is assumed to be less than the required return on equity, ke.
Price Earnings Valuation Method
The price earning ration (PE) is a widely watched measure of how much the market is
willing to pay for $1 of earnings from a firm.

A high PE has two interpretations.

A higher than average PE may mean that the market expects earnings to rise
in the future.

A high PE may indicate that the market thinks the firms earnings are very
low risk and is therefore willing to pay a premium for them.
64

A STUDY BASED ON INVESTORS

PREFERENCES

65

NEED OF THE STUDY

It is to find out that people want to Invests in which type of Instruments.
To analysis Indian capital markets

RESEARCH OBJECTIVES
To find if there is any relationship between income levels and the investment
Scheme preferred in capital markets.
To rate the areas of their knowledge based on a scale of 1-10 on the capital
market instruments.
To analyze if there is a pattern between the occupation and the types of
investments of the investors.
To find out the preferences in the way of trading in stocks.
(Online/offline trading)
To know the time period for there investments in the capital makets.
To study the origin, growth, and the regulation of capital markets in India

66

ANALYSIS AND INTERPRETATION

DATA COLLECTION

TABLE 1 AGE WISE CLASIFICATION

AGE
19-25
26-35
36-45
>45

NO OF PEOPLE
78
67
34
21
AGE GROUP

ANALYSIS
Most of the Investors are in the age group of 19-25
It can be inferred that most of the people are in the age were they are mostly
towards investing in capital markets.
This may be because as they see earnings opportunity in Indian capital markets
which is growing.

TABLE 2 OCCUPATION WISE CLASSIFICATION

67

OCCUPATION
BUSINESS
SERVICE
STUDENT
OTHERS

NO OF PEOPLE
74
87
28
11
OCCUPATION

In the sample size of 200, most of the people (43%) are there from the service.
We can infer from this that most of the service class people invest in IPO and
equity as it gives risk less and easy returns to the investors.
Sample size consists of less no students. As they dont have practical exposure
in capital markets.

68

TABLE 3 INCOME WISE CLASSIFICATION

INCOME
5000-15000
15000-25000
25000-35000
>35000

NO OF PEOPLE
28
91
46
35

Sample size consist of most of the people in income group of 15000-25000

It can be inferred from this that people in this Income group are more toward
investing in capital markets.

69

TABLE 4 INTRESTED IN TRADING/INVESTING

YES
NO

117
83
NO OF PEOPLE INTRESTED IN
TRADING

42% of the people gave a negative response on the capital markets.

It may because of speculation and fluctuations in Indian securities market.
58% of people prefer/interested in Indian capital markets as they see opportunity
to earn or to make profits in fluctuating markets.

70

TABLE 5 MAIN REASON BEHIND TRADING/INVESTING

REASON
FUTURE PLANNIGN
EARNINGS
EXEMPTION IN TAX

NO OF PEOPLE
43
136
21

It can be interpreted that most of the people wants to book profits in the bullish
market.
Future planning has been preferred by less no of people, as people want to earn
in the emerging market like India.
People dont invest in capital markets to get an exemption in taxes, as there is no
long-term capital gain in the securities market.

71

TABLE 6 INVESTMENT PREFERENCES

INVESTIMENTS
MUTUAL FUNDS
EQUITY
IPO
COMMODITY
DERIVATIVES
PMS

NO OF PEOPLE
25
57
78
7
27
6

Most of people invest in Initial Public Offer as it offer higher return and less risk
of investors
Inspite of high risk and volatile markets investors still prefer secondary markets
for investing in equities.

72

TABLE 7 KNOWLEDGE LEVEL OF THE INVESTORS IN PERCENTAGES

INVESTIMENTS
MUTUAL FUNDS
EQUITY
IPO
COMMODITY
DERIVATIVES
PMS

PERCENTAGE
63.9
65.8
83.33
15.4
30.3
35.7

When collected the data on knowledge level of respondents on a scale of 1-10

83.3% people were comfortable while investing in IPOs.
Knowledge level on commodity and derivatives is very less as it is new to
Indian markets and the investors should be educated.
Portfolio management service is also very less as most of the investors are selfinvestors.
TABLE 8 TIME PERIOD OF THE INVESTMENT DONE
TIME PERIOD
SHORT TERM
MEDIUM TERM

NO OF PEOPLE
39
113
73

LONG TERM

48

Most of he investors are medium term (1-3 months) as they make profits
whenever available to them in the markets.
Short-term investors are the people who do intraday trading i.e. invest for a
week or so in the markets. These are the people who are extremely intelligent
and have a high knowledge based on capital markets instruments.

74

TABLE 9 WAY OF TRADING IN STOCK MARKETS

WAY OF TRADING
ONLINE
OFFLINE

NO OF PEOPLE
113
87

Majority of the respondents prefer online trading accounts as it is easy and fast
and it does not require any paperwork.
Service class and the students mostly preferred online trading as it easy for
them. Because they can invest in markets at any point of time.
Respondents who prefer offline accounts is because of less brokerage and the
people are not IT savvy.

75

Null Hypothesis (H0) : There is no relationship between the occupation of people and
the investment option chosen.
Alternate Hypothesis (H1) : There is a relationship between the occupation of people
and the investment option chosen.

Contingency Table Income Levels and investment preferred

INVESTMENTS
OCCUPATION
BUSINESS
SERVICE
STUDENT
COLUMN

MUTUAL
FUNDS
12
6
5
23

EQUITY

IPO

DERIVATIVES

18
26
10
54

28
37
7
72

10
12
5
27

TOTALS
Degrees of Freedom : (no.of rows 1)* (no.of columns-1)
= (3-1) * (4-1) = 6
Signification Level () = 0.05
Chi-Square Critical (x2c) = 1.64

Expected Cell Frequency Table :

76

TOTAL
ROWS
68
81
27
176

INVESTMENTS
OCCUPATION
BUSINESS
SERVICE
STUDENT

MUTUAL
FUNDS
8.88
10.58
3.5284

EQUITY
20.86
24.85
8.28

IPO
27.81
33.13
11.045

DERIVATIVES
10.43
12.42
4.14

Chi Square (x2) = [(Fi-ei)2/ei]

X2 = 6.640597

It is seen that Chi square value for this contingency table is 6.640597 and the critical
Chi square value for a significance level of 0.05 and degrees of freedom: 6 is 1.64.
Hence, the null hypothesis is rejected.

There is a relationship between the OCCUPATION and the INVESTMENTS preferred.

77

Similarly, the relation between, pattern between the age group and the investments
preferred
AGE GROUP * INVESTMENTS PREFERRED

Null Hypothesis (H0) : There is no relationship between the age groups and the
investment preferred.
Alternate Hypothesis (H1) : There is a relationship between the age groups and the
investment preferred.

Contingency Table of AGE GROUP and INVESTMENTS preferred.

INVESTMENTS
AGE GROUP
19-25
26-35
36-45
>45
TOTAL

MUTUAL
FUNDS
5
8
7
5
25

EQUITY
30
16
5
6
57

IPO
33
29
11
5
78

DERIVATIVES
7
9
6
5
27

Degrees of Freedom : (no.of rows -1) * (no. of columns-1)

= (4-1) * (4-1) = 9
Significance Level () = 0.05
Chi-Square Critical (X2c) = 3.33

78

TOTAL
ROWS
75
62
29
21
187

Expected Cell Frequency Table : People

INVESTMENTS
AGE GROUP
19-25
26-35
36-45
>45

MUTUAL
FUNDS
10.0267
8.288
3.877
2.8074

EQUITY
22.8609
18.8983
8.893
6.4010

IPO
31.283
25.860
12.096
8.759

DERIVATIVES
10.8288
8.9518
4.1871
3.0320

Chi-Square (X2) = [Fi-ei)2/ei]

X2 = 16.72279
It is seen that Chi square value for this contingency table is 16.72279 and the critical
Chi square value for a significance level of 0.05 and degrees of freedom : 9 is 3.33.
Hence, the null hypothesis is rejected.

There is a relationship between the AGE GROUP and the INVESTMENTS preferred.

79

CHAPTER 5
CONCLUSIONS

80

FINDINGS

The Indian Capital Markets today present a vastly different picture from what it
was a decade ago
Lots of checks and balances with efficient and electronic tading, and settlement
system.
A range of players that include mutual funds, FIIs, hedg funds, corporates and
other institutions
Expansion of asset classes
From offer price to price discovery, GDR to reverse ADRs
Some of the major development in the markets have been in the area of
Primary markets
Extent Participation of Institutional Players
Introduction and progress of Derivatives
Settlement and monitoring systems
The Indian capital market has witnessed some significant reforms on the structural,
operational and regulatory front over a period of time. The changes such as abolition of
controller of capital issues, establishment of market regulator (SEBI), introduction of a
nationwide screen-based trading, dematerialization of securities, electronic trading,
sophisticated risk-management techniques, derivative trading, rolling settlement,
shortening of settlement cycle, ban on deferral products, formation of clearing
Corporation of India and demutualization of stock exchanges have marked a new era in
the functioning of the capital market.

81

CONCLUSION

58% of the people are interested in investing in capital markets as they see a
huge growth in Indian financial markets.
It can be seen that maximum service class people invest in IPO because of less
risk and reasonable returns.
Knowledge level on commodity and derivatives trading is very less when
compared to equity and IPO. It may be because investors are looking for profit
making in market.
It can be concluded from the chi square test 1 that their exists a relationship
between the OCCUPATION and the INVESTMENTS preferred i.e. people with
service class prefer IPOs than equity as it offers easy returns. Respondents with
business background prefer to invest in equities as they can afford to take risk.
It may be concluded from the chi square test 2 that there exist a relationship
between the AGE GROUPS and the INVESTMENT preferred i.e. with the age
above 45 would like invest in mutual funds and people with the age group 19-25
would like to invest in more IPOs and equities.

82

CHAPTER 6
BIBLIOGRAPHY

83

BIBLIOGRAPHY

WEBSITE REFERRED

www.nseindia.com

www.yahoofinance.com

www.hseindia.org

www.sebi.com

www.google (search)

JOURNALS AND MAGAZINES

Dalal Street
Journal on portfolio management
Harvard business review
Business standard
Business today

84